Luc Filiatreault has been through every funding scenario imaginable. “I’ve worked with six growth companies through numerous rounds of financing, from venture capital to private investment. What I can tell you from experience is there is a complete shortage of capital for Canadian businesses.”

The real funding gap is the mid-market stage, says the CEO of Neuralitic Systems in Montreal. “Once a small company in the innovation stage hits mid-size, the possibilities for getting funding to grow soon run out.”

These are typically companies that have crossed the technology-risk hurdle and have a few customers, he adds. “But they don’t have the sales channel, branding or full production capacity in place, so they’re not yet profitable. VCs don’t see enough return to fund them; private equity simply isn’t interested until they hit the profitability stage; and angel funds aren’t sufficient.”

We’re not fighting with equal arms. We have slingshots. They have nuclear weapons

Funding is not as much of an issue for early-stage, high-growth companies, points out Gregory Smith, chair of the CVCA (Canada’s Venture Capital & Private Equity Association) and managing partner at Brookfield Financial Toronto, says. “These typically attract venture capital funding because their growth is five times the rate of traditionally financed companies.”

The gap is where the commercialization of ideas comes into play, he confirms. “It’s not the beta test stage anymore. It’s about taking viable products and services, accessing markets and increasing production capacity to service national and international markets.”

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On the VC side in Canada, average funding is 40% or lower what a similar company could access in the U.S.

That can put a wrench in a company’s ability to compete, Mr. Filiatreault says. “Neuralitic has raised $20 million in capital since its inception which is exceptional for Canada. But the problem is every competitor on the world market in California or Asia has typically raised $70 to $80 million. We’re not fighting with equal arms. We have slingshots. They have nuclear weapons.”

Companies are simply not able to grow or compete because they don’t have access to that capital

“Companies are simply not able to grow or compete because they don’t have access to that capital,” says Sandi Gilbert, president of business consulting firm CCI Strategic in Calgary. “The system is structured in a way that makes it difficult for them. We could use some more tax sheltering through provincial and federal tax laws for example.”

While there is capital out there, it’s a matter of getting in front of people to access it, she adds. “We need to build an environment where we have all the pieces of the puzzle in place to make it happen.”

There is some hope on the horizon. Mr. Smith says he has seen progress in recent months as private equity entities are turning more of their attention to mid-market company needs.

There are moments when it can be a struggle to access funding for growth

“They’re stepping up quite dramatically to help mid-market companies grow. In 2011 for example, 287 companies received private equity financing which is the highest number in 20 years. The first half of 2012, 160 received it, which means we are on pace to exceed last year’s numbers.”

The only downside is that conservative lending habits and a global economic crisis means lower loan amounts per company.

A lot of time and attention is now being spent to help improve the financing prospects for growth companies, says Senia Rapisarda, vice-president, Strategic Investments & Initiatives for BDC (Business Development Bank of Canada) in Montreal. “We understand there is a need for a strong ecosystem of investors to build and grow mid-sized companies. Two years ago we took the initiative develop one that can support companies at different stages of growth.”

Her group focuses on two areas: early stage companies and mid-market organizations that need private equity capital. In the case of the former, BDC is investing in three accelerators across Canada (GrowLab in Vancouver, Extreme Startups in Toronto, and FounderFuel in Montreal). On the private equity side, it is developing an investment fund model that will enable firms to leverage resources more effectively.

Margaret Hudson, president of Burnbrae Farms Limited in Mississauga, is one who has experience different conversations with lenders over the years, depending on the business’ place in the financing spectrum. The family-owned company is Canada’s largest integrated egg company, and has grown five times in size over the past 20 years.

Even with its track record, she says, “There are moments when it can be a struggle to access funding for growth. I have no doubt that smaller businesses don’t present as much of a risk to lenders. But as you get bigger you are buying property and plants. Now we’ve got very good ratios and our funding requirements are relatively small. Things are good from that standpoint. But there was a time when they weren’t.”